June 24 (Bloomberg) -- China’s central bank said it may
adjust monetary policy as needed, suggesting officials are more
open to loosening policies as a cash squeeze risks exacerbating
an economic slowdown.

The People’s Bank of China said the nation should
“appropriately fine-tune” its policies, according to a
statement yesterday that summarized the monetary policy
committee’s second-quarter meeting in Beijing. It was the first
time since September that the panel, led by Governor Zhou
Xiaochuan, has used the “fine-tune” phrase.

The comments were released following an easing of the cash
crunch on June 21 after a gauge of interbank funding
availability rose to the highest since at least 2003. Slowing
growth in the world’s second-largest economy, a crackdown on
illegal capital inflows and efforts to rein in shadow banking
have contributed to increased borrowing costs.

“You could see this as one very modest sign that perhaps
the People’s Bank of China doesn’t want to scare the markets and
market players too much,” Louis Kuijs, chief China economist at
Royal Bank of Scotland Group Plc in Hong Kong, said by phone
today.

The PBOC, which didn’t elaborate on the fine-tuning or
reference this month’s developments in its statement, reiterated
that it will implement a “prudent” monetary policy, a label in
place since 2010. The meeting was held “recently,” the central
bank said without giving a date.

Restructure Economy

“We will optimize financial-resource allocation to make
good use of newly added credit and to activate use of granted
credit to support economic restructuring, transformation and
upgrading in a more forceful way,” the PBOC said in the
statement.

Risk is rising in China’s financial system as the shadow-banking sector expands and financial institutions make more
highly leveraged investments to boost profit, the official
Xinhua News Agency said in an analysis published yesterday.

Premier Li Keqiang signaled a determination to stamp out
speculation funded by cheap money with a June 19 State Council
statement saying banks must make better use of existing credit
and step up efforts to contain financial risks.

Zhang Zhiwei, chief China economist at Nomura Holdings Inc.
in Hong Kong, said today in a note that while the PBOC’s
statement was “less hawkish” than in the previous quarter,
“we are not convinced that the policy stance has shifted from
tightening to loosening.”

Independent Action

The PBOC doesn’t have the political independence of
counterparts such as the U.S. Federal Reserve, meaning senior
officials above Zhou must approve major decisions.

China will strive to make its monetary policies more
forward-looking, targeted and flexible, the central bank said
yesterday. Policy makers are paying close attention to the
latest developments in the global and domestic financial markets
as well as changes in international capital flows, it said.

China will keep pushing for reform of its yuan exchange-rate mechanism and interest-rate liberalization, the central
bank said.

The nation’s economy is on a steady path and consumer
prices are stable, it said, omitting a line from the first-quarter statement about the need to control inflation. The
central bank will use a combination of different monetary
instruments as it seeks to guide steady and moderate growth in
aggregate financing, it said.

Goldman Sachs

“The liquidity tightening is another indication that the
new government has put priorities on tackling the structural
problems,” Goldman Sachs Group Inc. economists led by Cui Li in
Hong Kong said in a report today. “These policies help to
foster more sustainable medium-term growth, but will test the
government’s tolerance for a cyclical downturn,” Goldman Sachs
said as it cut its 2013 expansion forecast to 7.4 percent from
7.8 percent.

While tighter funding conditions will have a “relatively
modest” impact on growth in the near term, “investment
deceleration is likely to be more visible next year as the
tighter credit conditions set in,” Goldman Sachs said.